2015’s Best & Worst States for Finding Tax Help

Mar 25, 2015 | John S Kiernan, Senior Writer & Editor

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There’s no shame in admitting it – many of us need a bit of help with our taxes. Whether due to time restriction, numerical aversion or a simple lack of interest, we look upon mid-April with foreboding and then watch as procrastination inevitably makes way to a last-minute scramble.

Haste and disorganization are most likely the two primary reasons why roughly 2.3 million people made math errors on their tax returns in 2013, the most recent year for which IRS data is available. So rather than spend the 16 hours the IRS says it takes for an individual to fill out their 1040, nearly 6 in 10 taxpayers hire a professional to do their returns.

But much like tax rates themselves, the accessibility, affordability and effectiveness of tax help differs significantly from state to state. In order to determine where the relative sweet spots happen to be, WalletHub compared the 50 states as well as the District of Columbia in terms of six key metrics – ranging from the number of accountants per 1,000 people to their average workload and mean hourly compensation.

More information about the significance of these data points as well as a comprehensive state-by-state rankings breakdown can be found below.

Note: The above table includes all metrics used in this report with the exception of State Tax Preparer Regulations. Only four states have such regulations:California, Maryland, New York and Oregon.

Ask The Experts: Tax Help Tips

We’re all about community at WalletHub. So, in the interest of helping the community better navigate tax season, we tapped our community of WalletGurus for expert advice on avoiding common mistakes, steering clear of scams, saving money and more.

Which are the most common mistakes tax filers make during tax season?

What are some tips and tricks for navigating the tax filing process and maximizing refunds?

What are the tradeoffs between using online tax software versus meeting with a tax professional?

What potential risks do consumers face when e-filling their tax returns?

Xiaoyan "Tony" Chu

According to the IRS website, there are several common mistakes tax filers may make during the tax season.

Having wrong or missing Social Security numbers. Double-check the SSNs on your tax return with the numbers on Social Security cards.

Having wrong names and/or address. Make sure there are no typos in the names of everyone on your tax return. According to the IRS website, if there have been any name changes, make sure to contact the Social Security Administration before you file your tax return with the IRS.

Having the incorrect filing status. Make sure you choose the right filing status. For example, depending on specific situations (e.g., having dependents or not), an unmarried or divorced taxpayer (including widow, widower and abandoned spouse) may file the tax return as Surviving Spouse, Head of Household, or Single. The best filing status among them would be Surviving Spouse as it has the best tax rate schedule. Make sure you meet the detailed and strict requirements to qualify for Surviving Spouse or Head of Household filing status.

Having the incorrect number of personal and dependency exemptions. Each individual taxpayer is allowed a personal exemption. However, if someone else can claim you as their dependent on their tax return, you cannot claim the personal exemption on your own tax return even if they give up the dependency exemption. Also make sure to check the requirements for “qualifying children” and “qualifying relatives” before you claim someone else as your dependent on the tax return.

Having math mistakes. It is especially important to verify all numbers if you are filing the tax return manually. Even if you are e-filing, you still need to be careful with some calculations, such as the total amount of W-2 wages and withheld if you have more than one job, the total amount of charitable contributions and qualified medical expenses etc.

Having the wrong bank account numbers. More and more taxpayers are choosing direct deposit for the tax refund. Make sure to double-check the routing and accounting numbers on your tax return.

Having forms not signed or dated. The IRS will not accept the unsigned tax return. Both spouses must sign on the tax return if filing a joint return.

Having errors or mistakes in figuring credits or deduction, failing to attach the necessary forms or schedules with your return, and/or failing to keep adequate receipts for expense deductions.

Common mistakes in claiming tax deductions include:

applying incorrect standard deduction when someone else can claim you as a dependent or when you are age 65 or older or blind;

failure to file or pay penalties. According to the IRS website, you might face a failure-to-file penalty or failure-to-pay penalty if you do not file or pay by the due date. If you request an extension of time to file your tax return, you still need to pay at least 90 percent of your actual tax liability by the original due date (normally on April 15th) to avoid a failure-to-pay penalty.

Patrick Colabella

Associate Professor of Accounting and Taxation at St. John's University, Tobin College of Business

Which are the most common mistakes tax filers make during tax season?

Usually, duplicating an item if you are using software that automatically allocates deductions. If you are not careful you can take double deductions or add income twice.

What are some tips and tricks for navigating the tax filing process and maximizing refunds?

It is where you put deductions and what tax position the taxpayer takes that makes the difference (i.e., Schedule C versus Employee. This is not so easy. It could be abusive, but if it is available you should use it when it’s right.

What are the tradeoffs between using online tax software versus meeting with a tax professional?

Good tax professionals ask questions to find deductions and to raise tax planning issues. Most people don't have a clue as to the tax ramifications of their decisions.

What potential risks do consumers face when e-filling their tax returns?

Possible identity theft but that is remote if you use a proper service provider like Intuit, CCH, etc.

How can tax filers avoid being scammed when seeking tax help?

They should never give their Social Security Number, date of birth, address or telephone number out without being sure the party using it actually needs it and will be trustworthy.

Linn Groft

We often see taxpayers make mistakes in determining filing status and dependency exemptions, particularly as children get older, as parents get separated or divorced, and as there are changes in who lives in the household.

Furthermore, there are a significant number of tax credits that could benefit taxpayers that go unclaimed every year. An estimated $133 million of Earned Income Tax Credits alone are left unclaimed by eligible families in Alabama. (Additional credits are left unclaimed nationwide.) Taxpayers are also often unaware of tax credits available to college students, taxpayers who contribute to qualifying retirement plans, and families that pay for childcare services.

What are some tips and tricks for navigating the tax filing process and maximizing refunds?

Make sure you go to a reputable tax preparer. If taxpayers earned less than $52,000 during the year, they should find a VITA tax site where IRS-certified volunteer tax preparers can provide high quality tax services with all the benefits of direct deposit and electronic filing completely free of charge. Find a Volunteer Income Tax Assistance (VITA) tax site near you.

There are only 4 states nationwide that provide regulation and training requirements for commercial tax preparers. As a result, we often have taxpayers come in and show us their returns from a previous year where a preparer was either grossly negligent or even downright fraudulent in preparation of the return. Sometimes they’ve received a letter from the IRS or end up owing a lot of money back. If you are not eligible for VITA services, the IRS has published tips for choosing a credible tax preparer on their website: IRS Tips for Choosing a Tax Return Preparer. When in doubt, talk to another preparer, consult VITA site, or IRS representative.

Keep in mind that higher credentials does not necessarily mean higher fees. The average Certified Public Accountant (CPA) charges approximately $165 for an individual income tax return, whereas many uncertified tax preparers would charge as much as $200-$500 for the same individual income tax return.

Keep paper records of relevant expenses throughout the year. Out-of-pocket medical expenses, tax preparer fees, charitable contributions, mortgage interest paid, local property and vehicle taxes, and other qualifying expenses could help you reduce your tax liability on the state and/or federal tax return. Talk to a tax preparer or consult the IRS website for qualifying itemized deductions. Teachers should keep records of school supplies they purchase out-of-pocket. College/graduate school students should keep track of required course supplies and books they purchase.

What are the tradeoffs between using online tax software versus meeting with a tax professional?

If taxpayers are eligible, I’d highly encourage them to find a VITA site near them. There is no downside to going to a VITA site! Volunteers are trained, certified, and are only there to help you. Find a Volunteer Income Tax Assistance (VITA) tax site near you. Taxpayers who earned up to $60,000 per year can use the IRS-sponsored MyFreeTaxes program to file for free online. If you are ineligible for free tax help through VITA or MyFreeTaxes, the top online services ask a fairly comprehensive set of questions to ensure you get all of the tax benefits you deserve. If you do decide to go to a tax professional, make sure you check their credentials beforehand using the IRS Tips for Choosing a Tax Return Preparer.

Talking with a VITA tax preparer or a tax professional can be helpful if you are confused about your tax return to ensure that you are getting all of the credits you’ve earned. The most important thing is understanding your own financial information.

If you have had a change in your family situation, you or your child are enrolled in college courses, you sold a home, you contributed to a retirement plan, you took an early distribution from a retirement plan, or you had a life event such as a death of a spouse, those things may affect your tax return. With the implementation of the Affordable Care Act, a VITA preparer or professional preparer can also ensure that you are claiming coverage exemptions and the Premium Tax Credit as needed. If you can’t find the information you need via the IRS website or IRS taxpayer hotline, talking to a VITA tax preparer or tax professional may benefit you.

No matter who prepares your return, I highly recommend asking the preparer to explain to you everything on your tax return, including all of the credits you’re eligible to claim, the adjustments deductions you are eligible to take, etc. You may also ask them if they can see anything that may change for you next year, i.e. if there are credits for which you will no longer be eligible next year or new credits for which you may become eligible.

What potential risks do consumers face when e-filling their tax returns?

E-filing returns is definitely the preferred method of filing when allowable. It reduces the amount of time to receive a refund. E-filing the return also catches certain minor mistakes (such as a name being misspelled or a required number being left off). The return preparer can then follow up with the taxpayer to correct those mistakes before re-submitting the return, thus preventing what could turn into a significant processing delay at the IRS.

To ensure your information is submitted securely, confirm with your return preparer that their computers are connected via a private, secure network (all VITA sites are required to do this.) If you file online on your own, make sure you are connected to a private internet network when you submit your return.

I also encourage taxpayers to use Direct Deposit to a savings or checking account to receive their refunds – there are no risks involved, but the refund is typically sent within 1-2 weeks compared to a 6-8 week wait for paper check refunds.

If you go to a commercial tax preparer, make sure you ask up front about the base fee for tax preparation and any additional fees for claiming certain tax credits or choosing direct deposit.

If you have an experience with a tax professional who misrepresents information on your tax return (such as include a dependent you didn’t financially support or ask you to lie about expenses you didn’t pay during the year) or does anything else that seems disreputable, you can report them online or call the IRS.

Reed W. Easton

Associate Professor of Taxation and Accounting, Stillman School of Business, Seton Hall University

Which are the most common mistakes tax filers make during tax season?

While the use of the split-refund option to direct deposit a refund into multiple accounts is making continued growth, some taxpayers and return preparers misuse this option to direct a portion of a refund to a preparer for payment of services. In addition, some paid tax return preparers continue to be noncompliant with Earned Income Tax Credit due-diligence requirements.

What are some tips and tricks for navigating the tax filing process and maximizing refunds?

Some methods to maximize a refund specifically in the case of nonworking spouses or spouses considering returning to the work force after a long absence might include:

Make a deductible IRA contribution, even if you are a stay at home spouse and do not work.
As a general rule, you are not entitled to a deductible IRA contribution unless you have wages or other earned income. However, there is an exception if your spouse is the breadwinner while you manage the home. For 2014 (and 2015), an individual can make a deductible IRA contribution of up to $5,500 ($6,500 if 50 or over) even if no earned income. Even if the working spouse is covered by an employer-provided retirement plan, the nonworking spouse can still make a fully deductible IRA contribution as long as the joint AGI as specially computed does not exceed $181,000 ($183,000 for 2015). To be deductible for the 2014 tax year, the IRA contribution must be made no later than your tax return due date.

Claim a moving expense deduction because of your spouse's job. Assume you are tired of a long difficult commute from your home in the suburbs to your office in the city and you determine to sell your home and buy a condo within walking distance of your office. Job-related moving expenses are above-the-line deductions meaning you do not have to itemize your deductions. Generally moving expenses are available only if (1) you start a new job or business at the new location (or are transferred by your employer), and (2) the new job location is at least 50 miles farther from your old home than your old job was from your old home. You do not qualify because you did not change your job or your work location. You can still may be able to claim the write-off if your spouse decided to return to work in 2014. You can deduct moving expenses if the distance between your spouse's job and your old home is at least 50 miles (this is a special distance test for those returning to the job market).

Get tax-free gain from home used as rental property for the last few years. Assume you have already moved and you are renting a condo or other home that you owned and used as your principal residence for at least two of the last five years. If you sold it in 2014, up to $250,000 of the gain from the sale is tax-free. You will have to recognize gain attributable to depreciation allowable with respect to the rental of the residence after May 6, 1997 and any gain allocated to periods of nonqualified use. $500,000 of gain could be tax-free for joint filers.

What are the tradeoffs between using online tax software versus meeting with a tax professional?

A trusted tax professional knows about a person's marriage or pending divorce, income, children, specific retirement concerns, and the details of an individual's financial life and can thus make more informed suggestions than the simple prompts of online tax software.

What potential risks do consumers face when e-filling their tax returns?

E-filing is generally safe. There is problem involving identity theft refund fraud. A weakness in the current tax refund system is the “look-back” compliance model used by the IRS. The IRS currently cannot do a matching of Employers' wage data (from Form W-2s) as such data is not available until months after the IRS issues most refunds.

Make sure the paid preparer signs and includes their Preparer Tax Identification Number (PTIN);

Ask questions and review your return before signing;

Never sign a blank tax return;

Inquire if the tax preparer has a professional credential (enrolled agent, certified public account, or attorney);

Set the service fees upfront;

Confirm that any refund due is sent to your bank account;

Confirm the preparer uses IRS e-file and request that the return be so submitted;

Confirm that the preparer will be available after April 15.

Robert Duquette

CPA, MBA Adjunct Tax Professor at Lehigh University

Which are the most common mistakes tax filers make during tax season?

Some procrastinate till April 15th to file, but if they had a refund, they should have filed sooner because the IRS does not add any interest to the refund.

Some taxpayers with a liability file way before April 15th when they could have waited till April 15th to file and pay what they owe at that time, generally without penalty if the underpayment is not substantial.

Some taxpayers file and they don’t have to file at all due to “minimum filing thresholds”. These establish certain gross income amounts that must be exceeded before a return has to be filed. For example, for 2014, taxpayers under age 65 who file as Single do not have to file a return if their gross income is under $10,150.

Not filing because they think they are under those filing thresholds, but they have federal income tax withholdings which can only be refunded if they file.

Not filing because they think they are under the filing thresholds, and have no withholdings, but may have been entitled to certain credits which are partially or totally refundable like the “Earned Income Credit”, the “Additional Child Tax Credit”, the “American Opportunity Credit”, and in some cases, the “Health Coverage Tax Credit.”

If you need more time to prepare the return, the IRS will automatically grant you a full 6 month extension if you timely file form 4868. But, the extension is granted only for the actual filing of the return, not for extending any tax you owe which still must be paid by April 15th.

Needless to say, for taxpayers doing their own tax returns by hand, double check the math by having someone else check it after you’re done, including checking which tax rate schedule is being used and recalculate the tax.

Whether you do it manually, or through software, double check any key data you entered that the IRS’s computers will easily and automatically catch, resulting in holding up your refund. For example, review social security numbers (including those of your dependents) and any amount reported to you on a form like a W-2, 1099, or 1098. And don’t forget that if you are filing a joint return, both spouses must sign and date the return. If you don’t do all these things, it will likely cause a serious delay in the processing of your return.

If you file manually, make sure the return is organized in the correct order, and has your social security number listed on each page, in case some pages get misplaced.

Choosing the correct filing status. For many taxpayers, this is actually a tricky and confusing area. For example, if you are separated from your spouse but not “legally separated” under a court decree, then you are still married according to the IRS, and your options are to file “married filing joint” or “married filing separately.” Even for married couples living together, the decision to file joint or separate should be done after considering which filing status provides the lowest tax. Although “married filing joint” is usually better, it sometimes is more advantageous to file “married filing separately” if the spouses have disproportionate levels of income or deductions. Another example is if you’re single and have a dependent who lives with you, then check to see if you qualify for lower tax rates under other filing statuses such as “head of household” or a “surviving spouse”. Be careful, each filing status has very specific criteria, all of which must be met in order to qualify to use that status.

Determining who is really a “dependent” can be even trickier. If you think you have a “qualifying child” or “qualifying relative”, check the rules carefully, especially if the child is 19 or older as of year-end, or the relative is a parent or grandparent and they don’t live with you. Also, I would guess most taxpayers would be shocked to learn that a totally unrelated person can qualify as a dependent under certain circumstances. The other tricky part of these tests is what constitutes providing “support”, e.g. does scholarship money count in that test, and that it makes a difference who is providing the support.

Deducting losses on dispositions of assets that were personal use, such as your home or car. Generally, such losses are never deductible, except if there is a casualty involved.

If social security is received, in many cases it is not taxable at all. It is only gradually taxed as adjusted gross income starts to exceed certain levels.

Forgetting to fund an IRA account by April 15th, in order to maximize the tax benefits of such an investment; investigating which type to invest in -- a Roth or traditional IRA; and tracking your tax basis of nondeductible contributions in the IRA for purposes of establishing how much of your later withdrawals could be tax free.

When making payments to the IRS, do not make the check to “IRS” as that can be easily altered. Instead, make your check payable to “U.S. Treasury”. And include your name, address, daytime phone number, and Social Security number at the top left of the check, and the tax year and “form 1040” in the memo portion of the check.

Test to see which is better: taking the standard deduction, or itemizing. For example, a taxpayer who is married filing joint, automatically is entitled to a standard deduction for 2014 of $12,400. Compare that to possible qualifying deductions if you itemized, e.g., medical expenses that exceed 10% of AGI (or 7.5% if 65 or older), property taxes, state and local income taxes, qualifying charitable contributions, mortgage interest and home equity interest expense (up to certain limits), investment interest expense (within limits), casualty losses that exceed 10% of AGI, and certain “miscellaneous” deductions that together exceed 2% of AGI.

Many taxpayers unnecessarily worry about the receipts they need to keep when they really didn’t get any benefit of any of their expenditures anyway. For example, the IRS estimates only about a third of Americans actually end up itemizing, with the rest taking the standard deduction. For those taking the standard deduction, there is no need to keep the receipts that would have supported an itemized deduction. (With that said though, you should always keep the records that support the cost of your investments and the cost and improvements to your home in order to reduce the taxable gain on its future disposition.)

Parents often overlook the fact that any “unearned’ (e.g. investment income) of a child is subject to tax at the higher of the parent’s rate or the child’s rate. This is known as the “kiddie tax” However, it can apply to “children” up through age 23. One big loophole to this is that it generally will not apply to the first $2,000 of the child’s unearned income.

Taxpayers are surprised to see that their net investment income is subject to an additional 3.8% tax since 2013, as well as the fact that higher income taxpayers are subject to losing 3% of “excessive” itemized deductions that exceed certain income levels depending on filing status.

When selling assets such as stocks, taxpayers need to dig up their cost basis to be able to reduce the gain on the transaction. This can be very time consuming and complex. Basis generally represents the original cost to you, or the cost to the person who gifted you the asset, or its fair value when you inherited it, plus any dividends you reinvested. However, if there were stock splits or stock dividends, the basis calculations for the total remaining shares you end up with are very complex.

Taxpayers forget about the Alternative Minimum Tax (AMT) which is a separate calculation that requires, among several provisions too numerous to list here, the add back of personal exemptions and standard deductions, certain itemized expenses (such as state income taxes and property taxes and the “miscellaneous deductions” they took), less an “exemption amount” depending on their filing status. Then that “recalculated” base of taxable income is taxed at a different rate, and the taxpayer has to pay the higher of their regular tax or the AMT.

Taxpayers also forget that if they are self-employed, their net earnings are subject to a self-employment (SE) tax since they did not have an employer deducting payroll taxes from their wages. The self-employed tax rate is generally 15.3%, but could be as high as 16.2% depending on income levels. The rate is relatively high compared to the normal 7.65% rate that employees are used to seeing because self-employed taxpayers must also pay the “employer” share since they are in effect their own employer so to speak. This is all done through a rather complex formula on form SE, which then also sets the stage for the taxpayer to deduct one-half of their total SE tax in arriving at adjusted gross income.

What are some tips and tricks for navigating the tax filing process and maximizing refunds?

In addition to the list above, not reading at least a summary of new tax law changes in the past year. Many taxpayers do not realize that some laws simply expired, while others were extended by Congress at the last minute. For example, at the end of the year, Congress extended and increase the ability of a small business (including sole proprietorships, S Corps and partnerships that all flow up to the individual owner taxpayer’s return) to immediately expense certain equipment purchases for 2014 retroactively, up to $500,000 within certain limitations, as well as allowing immediately 50% more deprecation of the cost of new equipment without any limitation.

Don’t forget to check if you are able to utilize any “loss carryovers or deductions” from prior years that were not utilizable in those earlier years due to various limitations, but may be able to reduce taxable income in 2014. This applies to any capital loss carryovers, passive loss carryovers, excess investment interest expense, excess charitable contributions and excess vacation home deductions. Some of these carryovers have a time limit at which point they expire unused, and others can be carried over indefinitely.

If you have a vacation home and rent it out to others, here’s a couple of little known loopholes you may qualify for: First, if you rent out the home for 2 weeks or less, and you have significant personal use, you legally don’t have to report the rental income at all, and you still get the mortgage interest and property taxes on the home deductible as an itemized deduction.

Second, if you rent it out for more than 2 weeks, and you also have significant personal use, the IRS requires that you apportion to the rental income and expense summary form, all deductible expenses (e.g. interest, taxes, insurance, repairs, utilities, cleaning, and depreciation) on the basis of the number of days rented divided by total days used. This usually results in most of the expenses of maintaining the vacation home to be listed on the rental income form, and a small amount deductible as mortgage interest and property taxes on the itemized deduction form. For most owners, this results in a currently nondeductible rental loss on their rental income form, which ends up being deducted only sometime in the distant future under certain conditions.

The second tip is to consider using what is known as the “Tax Court” method and see if that results in lower taxes now. Specifically, the Tax Court ruled several years ago, notwithstanding the IRS’s stated position, that a taxpayer could instead allocate the mortgage interest expense and property taxes to the rental income form on the basis of number of days rented divided by total days in the year, and the rest of those two types of expenses would be deductible as itemized deductions. The effect is that much less mortgage interest and property tax expense gets deducted on the rental income form, thus reducing a probable currently nondeductible loss, and shifts more of those expenses to the itemized deduction schedule where there’s a better chance of those expenses being currently useful.

If you received a refund of prior year’s overpaid state or local income taxes, the tax authority will have reported that to you on a form 1099-G, and almost all taxpayers doing their own tax return manually, will think that is taxable. But it actually may only be partially taxable or totally excludible under what the IRS considers a “tax benefit” rule.
Specifically, if the taxpayer took the standard deduction in the prior year (i.e. they did not get an actual deduction of state or local income taxes paid), then none of the refund is taxable. Also, the IRS considers that such tax deductions only actually provide a tax benefit to the extent that itemized deductions actually exceeded the standard deduction in that prior year. Therefore, for example, if we assume the amount of the refund was $400, and assume that the taxpayer’s standard deduction was $6,100 that year, and assume they actually deducted total itemized deductions of $6,400, then only $300 of the refund is taxable i.e. the amount of itemized deductions that actually exceeded the standard deduction. This “tax benefit” rule may also get triggered if the taxpayer was subject to the alternative minimum tax (i.e. AMT) in that prior year, because under the AMT, state and local tax payments are not deductible.

Taxpayers who had more than one employer in 2014 may have contributed more than legally required into the payroll tax trust funds because the succeeding employers restart the base from which the employee’s wages are subject to those taxes. Such taxpayers are entitled to a credit for overpaid payroll taxes.

Check your eligibility for the earned income tax credit, the child tax credit, the American Opportunity Credit, the Lifetime Learning Credit, or deduction for qualifying education expenses. These rules are very complex, some cannot be taken if you take others, and they all get phased out at various amounts of higher income depending on the credit or deduction.

Various significant energy credits are still available for 2014, including for your home’s HVAC system, insulation, roofs , water heaters, and certain windows and doors.

If you are self-employed, you are eligible for a deduction for determining AGI of 50% of your self-employed payroll taxes, as well as 100% of your health care insurance premiums.

If you run a business as a sole proprietorship, S Corp, or partnership, consider the applicability of the credit for research and development expenditures, and the domestic production activity deduction, which can produce considerable savings.

If you are thinking of itemizing, consider often overlooked deductions as follows:

Long term care expenses (subject to certain limitations), as well as transportation expenses and related lodging in connection with seeking medical care can be included as qualifying medical expenses;

Transportation expenses in connection with your charitable efforts;

Additionally, a tax court case ruled that if the taxpayer had to install special equipment in their home for medical reasons, e.g. an elevator or possibly even a swimming pool, and the taxpayer can demonstrate that the primary purpose of that expenditure was required for medical purposes and care, then the excess of the special equipment cost over the increase in value of the home resulting from that addition, could be currently deductible as a qualifying medical expenses.(But of course, if it’s a pool or spa, you can be sure the IRS will try to argue it was primarily for personal pleasure.)

If you purchased a home with debt, you can deduct as additional mortgage interest any “points” you paid to obtain the loan.

If the points you paid were for refinancing a home loan, the IRS’s position is that the points can generally be deducted as interest ratably over the term of the new loan.

What are the tradeoffs between using online tax software versus meeting with a tax professional?

Tax software is a great tool for most tax returns that are straightforward with not much complexity, i.e. the taxpayer may have wages and salaries; interest and cash dividend income; maybe an IRA contribution; no question as to who is eligible to be claimed as dependent; takes the standard deduction; and maybe a few credits that are not that difficult to work through.

However, a tax professional is more ideal when the taxpayer has experienced or is involved with anything other than receiving wages and interest and cash dividends and taking the standard deduction. The following is just a partial list of situations that should have you wondering if you should seek the help of a professional:

A sale of stock but the taxpayer is not sure what their basis is (see prior discussion of how complex that task can be);

Own a home used as a principal residence and wondering which expenses are deductible;

A sale of that home (gains are excludable up to a certain amount if you meet certain criteria, but losses are not deductible);

The taxpayer has a vacation home that is rented part of the year to others (these are subject to highly complex rules of what is deductible, how much and when);

A sale of that vacation home;

Taxpayer has interests in partnerships or S corps whose results flow up to their personal return, and those businesses have loans which may affect the owner’s basis or amount “at risk” in the business for purposes of deducting losses;

If the taxpayer has “passive” type investments whose losses are limited under the passive loss limitation rules;

Has farming income and expenses (lots of special rules for farmers);

Worked overseas during the year, or has an ownership interest in a foreign business or activity, or has foreign bank accounts;

Is self-employed and concerned about what is deductible and what is not deductible, and what methods of accounting to choose for their Schedule C (e.g. only 50% of meals and entertainment is deductible; but as previously mentioned, you can take immediate expensing of your equipment purchases up to a certain amount);

You experienced a major life event in the past year such as getting married or death of a spouse or you moved or took a new job;

You received stock dividends during the year or were notified of a stock split;

You or a dependent incurred college tuition expenses and are interested in knowing what is deductible or eligible for a credit;

You maintain a home office;

You have a “hobby” which produces income and not sure if that is taxable and what would be deductible;

You believe you may be entitled to certain credits available to taxpayers who are not in the higher income brackets such as the “child tax credit”, the “child and dependent care credit”, or the “earned income credit”, with each having their own qualifying criteria which must be met in order to secure those credits; or

Made a substantial gift during the year and are wondering who pays the taxes on that gift (generally the donor pays any gift taxes, not the recipient, but there are exclusions and ways to legally avoid that tax);

You received an inheritance or life insurance proceeds and not sure what is taxable;

Some of your installment credit card debt or home mortgage was “forgiven” or discharged during the year and wondering how much, if any, of that forgiven obligation may be taxable to you;

You received a distribution from a 401(k) or IRA plan during the year, and you are not sure if any of it is excludible;

You received gambling winnings and not sure if you are allowed to deduct gambling losses, and where to report all that;

You were disabled and received disability benefits from your own insurance or from your employer and not sure if those benefits can be excludible;

Gave away appreciated property to a qualifying charity (this triggers some complex limitations); and lastly

As has been widely reported for months now, consider getting professional tax help if you were affected by the Affordable Care Act in 2014 either because you or your spouse took a credit for subsidized health care, or did not have health coverage and may be facing a penalty.

All these matters above can be rather complex to understand and to report properly, as well as many more not listed here. Any complication is best addressed with a conversation with someone trained in knowing what to ask you and what to look for in order to comply with the law, but to see how to maximize your refund.

And of course, if you are nervous about looking at tax forms and the responsibility you take when you sign, perhaps talking with a professional will help lessen your anxiety when you sign.

What potential risks do consumers face when e-filling their tax returns?

Someone hacking into your refund, or worse, your entire identity

Keep a backup copy

Change your password on it from all others you use which may already have been hacked somewhere else.

Don't use public Wi-Fi

Have security encryption on the Wi-Fi you use for doing the return.

Sometimes the form you need is not available by the online software (e.g. if the law recently changed), or the IRS is not set up to receive a particular form electronically.

The filing will be automatically rejected if you failed to include the correct exact information requested on the prior year return, e.g. taxpayer names, social security numbers, birthdates, addresses, names of dependents, or total AGI.

You cannot use the e-file system to file an amended return of a prior year, an original return for a prior year, or a corrected return for the current year, after already having an approved e-filed return for the current year.

How can tax filers avoid being scammed when seeking tax help?

Don't assign any part of your refund to the preparer. The IRS has recently issued an alert warning taxpayers not to do this, as they are finding many “preparers” are asking the taxpayer to assign part of their refund to them to cover any repayments of the excess health insurance credits taken, or penalties owed for not having health insurance.

Additionally, the IRS announced they are dealing with an unprecedented wave of phone scam incidents whereby the criminal is posing as an IRS agent, and aggressively threatens the taxpayer to pay their outstanding tax debts to accounts they have set up. The IRS reminds taxpayers that the IRS will never call you at home requesting payment.

Also, the IRS warns, be on guard for “phishing”: fake emails or websites looking to obtain your personal information. The IRS has said they will not send you an email about a bill or refund without your permission first. So, do not open any email purporting to be from the IRS, and never click on links in them.

Avoid signing a blank tax return ahead of the preparer doing the work, and be wary of anyone who asks you to do this.

The IRS estimates that about 60% of taxpayers use paid preparers, and that most of them are legitimate, honest professionals providing high quality work. Unfortunately, you need to watch out for those few who try to convince you to perpetuate a fraud by: inflating personal dependency exemptions, deductions and credits; under reporting income; getting involved with a highly aggressive tax shelter that seems too good to be true; claiming excessive fuel tax credits (a recent scam); taking a position on the return that seems “frivolous” to you; or give them a higher fee in the form of a percentage of the refund, or just outright steal your identity.

Jared Moore and Pete Frischmann

Professors of Accounting, Oregon State University College of Business

Which are the most common mistakes tax filers make during tax season?

Common mistakes include math errors and filing status issues. Taxpayers should make sure to check their math, particularly if they prepared their own return. Taxpayers should also make sure they are using the correct filing status as this affects the amount of tax owed for the year. This is an issue particularly for taxpayers who have experienced a divorce, a death in the household, or who have children, as these things complicate the determination of filing status.

What are some tips and tricks for navigating the tax filing process and maximizing refunds?

Tips might include:

Keeping accurate records throughout the year and preparing information summaries in a clear, complete manor;

Maximizing retirement plan (e.g., IRA) contributions;

Making sure to file on time even if unable to pay;

For those who will file an extension, being aware that extensions delay the required filing date, but not tax due…all tax must be paid in by April 15 regardless of whether the return is extended;

From a long-term perspective, invest in tax planning through a professional.

What are the tradeoffs between using online tax software versus meeting with a tax professional?

Reputable online tax software is a great, relatively inexpensive way to go for those with uncomplicated returns. Although more expensive, there is no substitute for a professional for taxpayers whose situations are complicated (e.g., self-employed, complex deductions, heavy investment trading activity, ownership in flow-through entities such as partnerships) or who have experienced major life changes.

Low-income taxpayers (often defined at below $60,000) with simple situations, may want to consider using free AARP/VITA sites and/or free electronic filing that is available through the IRS website.

What potential risks do consumers face when e-filling their tax returns?

Potential risks associated with e-filing include:

Data security: A taxpayer should make sure that the computer used to e-file has adequate security resources to execute a secure data transfer to the IRS;

Clerical errors: A big e-file risk is including the wrong bank account number on the e-filed return (for purposes of the refund). Incorrect bank accounts make it difficult to recover the refund. Note that this is also a risk when asking for direct deposit on paper-filed returns;

High complexity: Some very complex returns cannot be e-filed, generally because the e-file system used by the IRS does not support all of the required forms. A list of supported forms is available here.

How can tax filers avoid being scammed when seeking tax help?

To avoid scams, taxpayers should either choose a reputable tax preparer or prepare the return themselves. Preparers should not receive taxpayer refunds nor promise refunds that seem too good to be true. Some of the biggest scams going on right now are internet and phone scammers pretending to be IRS agents and asking for payment by debit cards.

Ann B. Cohen

Associate Professor of Accounting, University at Buffalo School of Management

Which are the most common mistakes tax filers make during tax season?

Some common traps for the unwary include determining whether state income tax refunds need to be included in income, properly determining application of the alternative minimum tax and proper reporting of sales of investment assets under the new reporting rules. Another recent development is the new reporting requirement for bank accounts and other assets located outside of the United States which carry very severe penalties if not handled appropriately.

What are some tips and tricks for navigating the tax filing process and maximizing refunds?

One area in which taxpayers need to be particularly careful about is how they include on their returns the information received from banks, investment companies, employers and similar reporting entities. The tax return information has to match up precisely with the W-2s and 1099s or taxpayers’ processing of returns will be stalled and an audit may be triggered.

What are the tradeoffs between using online tax software versus meeting with a tax professional?

An individual builds a longer term relationship with a true tax professional, similar to that with a doctor, so that when issues come up there is a trusted professional to turn to who understands your business and investment background and your family situation. Software can’t do that. Having an ongoing relationship with a professional is particularly important if you own a business, have rental properties and other complex investments.

What potential risks do consumers face when e-filling their tax returns?

In my opinion, e-filing is no riskier than on-line banking or shopping.

How can tax filers avoid being scammed when seeking tax help?

Always examine the credentials of the individual preparer. CPAs are licensed by the state after undergoing a rigorous education, a national exam and supervised experience. State licensing agencies often have searchable databases to see whether any complaints have been filed. Enrolled agents, while not subject to the same educational, examination and experience requirements, do have to pass an exam given by the IRS and can be sanctioned by the IRS. If the preparer is not a CPA or an enrolled agent, there is no baseline for evaluating credentials.

Methodology

Local differences in the accessibility, affordability and effectiveness of local tax help are somewhat difficult to quantify, and while none of the metrics that we used in this report are perfect in their own right, they do collectively illustrate the general tenor of the local landscape.

Accountants Per 1,000 People – Weight: 1

This metric speaks to the accessibility/prevalence of qualified tax help within a given state. The more accountants there are, the better off taxpayers should be. Even if all of the accountants in a given area are not focused on individual tax preparation, a large number of qualified tax professionals in a given area speaks well to the accessibility of helpful information – whether formal or informal – as well as the vibrancy of the local tax community.

Accounting Job Openings Per 1,000 People – Weight: 0.5

A state with a high number of accounting job openings would seem to have tax needs that are not currently being met. For the time being at least, such areas are not great places to find tax help. Given that the data used to construct this metric likely includes non-tax accounting job openings, we assigned it only a half weight.

Affordability of Tax Help – Weight: 1

This metric reflects the ratio between the average hourly rate for accountants and auditors in each state and the average wage in each state.

Returns Filed Per Accountant – Weight: 0.5

The metric speaks to the workload of local accountants. Tax preparers who have fewer returns to work on are able to be more attentive to each case and are therefore less likely to make errors and omissions. Given that the number of accountants used to construct this metric includes accountants of all specialties, we assigned it only a half weight.

Percentage of Filers Paying for Tax Help – Weight: 0.5

A high number of paid returns indicates cheap, accessible and effective tax help. However, given that state-by-state wealth disparities and differences in tax code complexity stand to influence the rate of paid returns, we assigned this metric only a half weight.

State Tax Preparer Regulations – Weight: 0.5

Four states (California, Oregon, Maryland and New York) have established regulations for independent tax preparers who are not otherwise qualified as CPAs, attorneys, banking officials or “qualified agents.” Given the prevalence of scams and fraud in the tax space, this report viewed those states favorably. However, we assigned this metric a half weight since the use of such regulations can currently be measured only in a binary sense.

Source: The data used to conduct this report is courtesy of the Internal Revenue Service, the U.S. Census Bureau, Indeed.com, and the U.S. Department of Labor Statistics.

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Community Discussion

Hi. Great article and research. Why not use the IRS PTIN data to calculate these numbers so as to show exactly how many people are preparing taxes instead of using accountants? As you mentioned, many accountants do not actually file tax returns. The IRS started requiring anyone filing a tax return professionally for a client to have a PTIN a couple years ago. As of 2011, there were approximately 730,000 PTIN holders according to IRS data. Contact me if I can assist you further. ;)